Prudential Mega Rights Issue

Prudential has announced a mega rights issue. It will be the largest one in British history. Prudential are raising money to buy AIG’s Asian life assurance business. Prudential are hoping to raise GBP14.5 billion by selling shares to its shareholders.

Whereas small businesses are struggling with liquidity due to lending restrictions, Prudential is borrowing money from its shareholders.

So, why are Prudential wanting to buy an Asian bank during these tough economic times? Is it a safe investment for its shareholders?

Terms of the Pru Rights Issue

Shareholders are entitled to subscribe to 11 shares for every 2 shares held at a call price of 104p per share.

Under the terms of the Rights Issue, Prudential will issue 13,964,557,750 Rights Issue Shares at the Issue Price of 104 pence per Rights Issue Share on the basis of 11 Rights Issue Shares for every 2 Existing Shares held by Qualifying Shareholders on the Record Date of 4 June 2010. The Issue Price for HK Shareholders and Singapore Shareholders is HK$11.78.

The Issue Price of 104 pence per Rights Issue Share represents a 39.3% discount to the theoretical ex-rights price (TERP) based on the Closing Price of a Prudential Share of 542.5 pence on 14 May 2010 and a 80.8% discount to that Closing Price.

The Rights Issue is expected to raise proceeds of approximately £13.8 billion (net of fees and Transaction-related expenses) and is fully underwritten by Credit Suisse, HSBC and J.P. Morgan Cazenove together with a syndicate of other underwriters.

  • Nil paid sedol: B64R3G5 – PRUDENTIAL ORD GBP0.05 (N/P 23/06/10)

Key Dates

  • Ex-date: 8 June 2010 – this is the date that the nil paid rights will be added to your account. The market price of the ordinary shares will fall to compensate these additional shares. They start trading on this date.
  • Pay Date: 23 June 2010 – the closing date has been announced as the 23 June 2010, this is likely to be the paydate, when the call is paid and the nil paid rights converted to ordinary shares.

See the latest Pru prices.

Equation to Sell Rights to Take Up

In response to one of our readers (Joyce) we have added an equation to allow ISA holders (or any shareholder) to quickly calculate how many nil paid rights you need to sell to take up the remaining using the sale proceeds.

No of nil paid rights to sell = Your holding X (Call Price – Total price of nil paid rights incl. fees).

If rights trade at about 20p, and with any brokerage fees the value to sell is £0.20. For a holding of 22,000 nil paids (based on a holding of 2,000 ordinary shares) your calculation is:

22,000 x (1.04 – 0.20) = 18480 nil paid rights. These will give you £3696.00.

Then to take up the remaining 3520 nil paids (i.e. 22,000-18480) your call is £3660.80 which leaves you with £35 left over. If you fiddle with the figures you may find that you can sell 1 or 2 nil paid less and end up with less money left over.

  7 comments for “Prudential Mega Rights Issue

  1. CityAnalyst
    May 25, 2010 at 4:59 pm

    OK, on ex-date the price of the ordinary shares will adjust and nil paids will be distributed. The trading price of the nil paids plus the call price (104) should represent a discount to the ordinary share. We will have to review the prices on ex-date.

  2. CityAnalyst
    May 25, 2010 at 4:45 pm

    Hi Mark, apologies for the delay in responding. I shall address this with some additions to the article.

  3. Mark O'Shea
    May 25, 2010 at 4:36 pm

    Very interesting point

  4. Mark O'Shea
    May 23, 2010 at 1:03 am

    I’m a bit confused how this prudential rights issue is a discount? I have 6000 pru shares currently trading at just say £5.30 which values them at £31,800. presumably i will therefore be offered 33,000 rights issue shares (6000/2×11) at the price of £1.04 costing me £34320. I therefore presume that i will end up with 6000 original shares plus the 33,000 rights issue shares making 39000 shares intotal. My question is if i add the current value of my 6000 shares (£31,800) to the cost of the rights issue shares (£34,320) i believe my cost will be (forgetting the actual cost of my 6000 shares) will be £66,120. Assuming a terp of say £1.72 my 39,000 shares would be worth £67,000. Therefore i cannot see the 40% discount as theoretically i would only be £880 better off but would have pumped in another £34,320. Am i missing something in my understanding as presumably if i did nothing my 6000 shares would be reduced from £31,800 to £10,320 (6000 x £1.72)? Thanks

  5. CityAnalyst
    May 18, 2010 at 1:23 am

    I have added the rights calculation to the main article to that anyone that wants to sell nil paids to take up the remaining rights can easily work out how many to sell.

  6. CityAnalyst
    May 18, 2010 at 1:08 am

    Hi Joyce, you should be able to still take advantage of the offer, but you will need to speak with your plan manager. You will be issued nip paid rights, which are like mini-shares in the company. These are tradeable. You can sell some of the nil paid rights and with the money take up (buy/subscribe) the remaining rights. Your plan manager may calculate this for you. As you are not actually investing any additional money into your ISA it does not affect your annual allowance. It is a tricky thing to calculate, but say you own 10000 nil paid rights, it will cost you £10,400.00 to buy them at 104p. If the rights trade at 20p then if you sell 8387 nil paids, you should get £1677.40 (assuming there are no fees). This will allow you to take up 1612 rights (1612*1.04 = £1676.48). This allows you to make the most of the rights issue without spending any money. Essentially you gain 1612 new shares. Of course, this is not shares for nothing as the trading price will drop to compensate, but if the discount to market is good you will be gaining that difference. Alternatively you could just sell the nil paids at have the money added to your ISA, if that is allowed.

  7. Joyce
    May 18, 2010 at 12:49 am

    I have a Prudential ISA but have already invested my annual entitlement this year. Does this mean that I can not take advantage of this offer?

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